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Top tips on lending to charities

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Traditionally the charitable sector is more likely to save than to borrow, however there are many instances in which it may be necessary or attractive for a charity to borrow.

Charities are often reliant on grants and donations but these are not usually a guaranteed source of income, and grants may include specific requirements on how they can be used. Charities may be attracted to borrowing because of the certainty and flexibility it offers.

Legal status

A charity is not a legal form or structure itself. It is a legal status given to an organisation which is established for exclusively charitable purposes and is subject to the provisions of the Charities Act 2011 (CA2011). From the outset it is important to check what type of legal entity the charity borrower is, as this will govern the approach that needs to be taken to the transaction.

The majority of charities used to take the form of charitable trusts, charitable companies (often limited by guarantee) or unincorporated associations, but increasingly, charities are switching to become a charitable incorporated association (CIO). This is a relatively new legal structure under which the entity has separate legal personality and its members have limited liability, but crucially it only has to register with and report to the Charity Commission. This is intended to ease the administrative burden on the charity. From a lender’s perspective, it is worth noting that while the Charities Commission does have an online register of charities registered with it, it does not maintain a register of charges.

Power to borrow?

The charity’s power to borrow should be checked. Ideally, an express power to borrow and grant security over assets will be set out in the charity’s governing document (be that articles of association if the charity is a limited company, or the constitution if the charity is a CIO, for example). If there is no express power, then a lender may be comfortable for the charity to rely on a ‘catch all’ provision in the governing document which gives the charity a general right to act in any way to further its objects.

Alternatively, if the borrower charity is an unincorporated trust and the purpose of the borrowing and granting of security relates to the purchase, maintenance or improvement of land held on trust, the trustees will have the powers of an absolute owner in relation to that land[1]. The Charity Commission argues this would include borrowing for that purpose.

Where possible, however, it is recommended that in the absence of an express power to borrow, the governing document be amended to include an express power so as to remove any future doubt.


Who will need to enter into the finance documents?

Limited company or CIO:

If the charity is a limited company or CIO, it can enter into the documentation and incur obligations and liabilities itself. A limited Company in any of the usual acceptable methods of signing by companies, and a CIO by way of a common seal (if it has one), or by having the document signed by at least two of its charity trustees.

Unincorporated association or trust:

An unincorporated association or trust does not have separate legal personality from its trustees and so the trustees will need to enter into the documentation personally on behalf of the charity. Given that this means the trustees will incur personal obligations and liabilities, they may seek to limit the recourse a lender has under the covenant to pay[2]. The lender will need to consider whether such limit is palatable to them.

Trustees are often volunteers and may well delegate responsibility for daily management to senior staff, fulfilling their duties at meetings that have been organised well in advance. For this reason it is useful to check availability of the trustee signatories early. If necessary, check the charity’s governing documents for meetings to be held at short notice. Alternatively, the trustees may be allowed to delegate their powers to bind the charity but the delegation documentation will need to be reviewed.

Taking security and section 124

If the borrower charity holds land or is acquiring land with the proceeds of the loan, the lender is likely to want to take security over that land. For the majority of charities, the provisions of section 124 CA2011 will apply to any such charge. Under that provision, no mortgage or charge of land held by or in trust for a charity can be granted without an order from the Charity Commission or the court, unless the charity trustees have obtained and considered proper written advice on the charge/mortgage on certain matters. It is expected that in most cases advice will be sought rather than an order.

CA2011 details what constitutes ‘proper’ advice and while it is ultimately a decision for the trustees as to who gives the advice they rely on, the lender will want to be comfortable that the correct procedure has been followed and may require a certificate from the advisor confirming that the advice was given.

The charity or its trustees will need to provide statements which are in a prescribed form in the charging document on whether section 124 applies and, if so, that the necessary advice has been obtained and considered. It is crucial for a lender that these statements are given because:

it will ensure that the security can be registered at the Land Registry;
where they have been included, there is protection for third parties who advance money in good faith by way of a conclusive presumption that the facts are as stated in the certificate.

Registering security

As mentioned above, be mindful that there is no register of charges held by the Charities Commission, although if the charity is a UK company, any security should be registered at Companies House.

Security over property should be registered at the Land Registry and it should be considered whether there is security over any significant intellectual property rights which could be registered at the relevant intellectual property office.

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